This is almost the opposite of public companies, which rarely issue new shares, and have a constant buy pressure coming from 401k plans and other automatic investment vehicles.
Right now the institutional news all looks negative -- e.g. the failure of mt gox and the unfavorable tax treatment in Japan (and now the US).
So that's an increase of .02% per day.
This doesn't come close to accounting for the price swings we've seen in the last 6 months. There are much larger forces at work. What these forces are exactly is...difficult to determine.
How about: "lots of people who bought at the top of the BTC hype are now abandoning the BTC market because they lost faith in their get-rich-quick scheme?"
The meteoric rise and slow but steady deflation in the BTC price you see now has all the properties of a classic, media-fueled bubble. At one point people who were never interested in monetary systems or cryptocurrencies at all, were asking me how they could buy BTC because they heard on the news it went from $100 to $500 in a few weeks. These are not idealists or miners, but just hoped to ride the hype train up and make a few quick bucks without actually having to work for it.
I don't think it's 'difficult to determine' why it's fading now. Maybe if you completely live in a kind of echo-chamber that HN appears to be on topics like this, but looking from the outside it all makes perfect sense.
1. In theory difficulty and hash rate should follow the bitcoin price, but they don't. You'd think that as price decreases difficulty re-adjusts as miners pull out but difficulty and hash rate continue to increase and are completely disconnected from the price. Charts:
Because of the disconnect, you can conclude that most mining business models are based on the future price of bitcoin. The miners are either true believers in the future potential, or they are effectively stuck because they have sunk upfront real USD but are currently mining at a loss and have no choice.
2. Most mining at the moment is being done at a loss. This continues from point 1, but if you look at a mining calculator your can work backwards and calculate at which electricity price point mining is currently profitable at.
As an input for our calculation, lets assume all miners are running the equivalent of a KnC Neptune, a new 20nm-based board that hasn't been released yet but it due out in a month or two (hah!):
We will normalize their figures based on price per TH hashrate, and price per GW output. They promise 3TH for $10k, and they promise 2,300W.
So for each TH it is $3.3k upfront, and 733kw/h to power that TH.
Plug those figures into a calculator:
Your gear is generating $32 per TH per day, so $96. To pay off only your hardware would take 104 days, this is with 0 electricity cost. You'd need to find electricity
at a few cents per kw to break even. The sums aren't good.
 This is possible in only a couple of places, mostly scandinavian nations with geothermal electricity supply or nations where electricity is subsidized like China and India. Even at a low 8c/kw your hardware (which is being delivered) is paying itself off in 118 days at todays difficulty rates (which won't hold).
3. A big problem with mining is that your investment decision is inelastic (not sure if that is the right term). You decide to invest at todays difficulty and bitcoin rate but outside of cloud-based mining you don't actually get started mining after placing your order for at least a month, often 5-6 months. So that means when there are little openings in the window for mining profitability everybody piles on, and you find when you get up and running that your mining estimates are an order of magnitude off because a lot of other people had the same bright idea.
The hashrate and difficulty charts show that with their increases. If you plotted the announcements of new generation mining gear against those charts in the same way Google News does you'd likely find that each big spike is equal to in time as new_mining_gear_announcement_date + new_mining_grear_delivery_date
4. Newly mined coins can't be transferred for at least 100 confirmations. This was an impromptu patch applied by the bitcoin project and a number of markets to defeat some sort of bug, but I can't recall or can't seem to find the details at the moment and can't recall what it was fixing or if the 100 number is correct. If anybody knows the details of this, i'd be interested in finding it again.
So when looking at the blockchain for newly minted coins, you'll never see them move immediately, there would be an at least 100 transaction delay (which isn't long in real time terms).
5. On non-volatile days the markets combined trade around 15M coins. On highly volatile days like today the combined volume exceeds 120M coins. 3,600 new coins are mined per day, so their input ranges from 0.01% of coins traded to 0.002%.
Note that this is traded volume, rather than percentage of coins, and the low trading days are often only a few million transactions per day.
6. You can follow the newly mined coins on the Blockchain. Ghash.io is anywhere from 35-50% of the total hash rate (which in itself is controversial) and their newly generated coins go to this address:
You can see that most of the coins remain unspent, and GHash.io is a unique case where you'd expect more of the coins would be spent, which i'll explain in my next point.
7. The hash rate and return itself has now become commoditized and can be traded like a derivative. cex.io was a pioneer here and they have an active market for buying and selling GH/s mining. Their pool is the GHash.io pool mentioned above.
Their current price for a GH/s of mining hashrate is 0.01058690 BTC, or around $4.03 USD. If you compare to the yet unreleased Neptune above, it is $4030 per TH/s vs the Neptunes $3,333 per TH with no electricity costs - and you can move in/out as you wish.
I have previously profitably traded on cex.io using an automated trading bot. It hasn't been active in a long time because I haven't updated it to suit the new conditions.
Here is my referral link to signup to cex.io, I get 10% of whatever you purchase:
Here is the base open source version of my bot, which doesn't have any of my strategies built in it, but which can be extended:
I'll likely bump the version currently there with my new strategy interface in the next few weeks since I believe there are new opportunities in GH trading again on CEX. If you're interested in trading strategies, get in touch. The most basic mechanism in that bot will take your mining return and pour it back into purchasing GH/s so that your returns are compounded.
A lot of the return you get in CEX is from the other coins that are mined alongside Bitcoin when you purchase GH/s.
Note that nothing in the bitcoin world really makes sense, so the rules from normal public stock markets or strategies that might work there don't apply in the bitcoin world. You can see from the disconnect between hashrate, difficulty and price that a large part of Bitcoin price and market movement is speculation and emotion driven. You can still take advantage of this, though - as a lot of the price is driven by news events and emotional reactions to them.
Since it is so easy to move in/out of mining on CEX, you'd assume their mined coins are more liquid than the miners who setup long-term projects and are looking for a return based on future bitcoin price, but even at the CEX.io address you see only a small number of coins being moved.
8. In theory it would be possible to go back through the blockchain and measure/quantify what percentage of newly mined coins in a certain time period are being spent. Anecdotally i'd estimate the percentage is very low, and that most coins in circulation are greater than a year old (eg. i'd estimate 99.5% of traded coins were mined +1 year ago).
tl;dr: the current mining business model is based on future bitcoin price, most newly mined coins are held.
The real reasons people continue to mine are one or more of these:
-It is fun
-It secures the network
-They wrongly think they will make a profit
There is no investment in human history that works like that.
Sure there is. Just none that is not also extremely likely to fail.
The obvious example would be a lottery ticket.
Oracle has returned around 80,000% since IPO. Dell, Cisco, Microsoft, AOL, numerous others all pulled a greater than 10,000% return post IPO.
Las Vegas Sands managed around a 7,000% return from the 2009 bottom to recent top.
What do you suppose Andy Bechtolsheim's $100k check / investment into Google returned?
There are in fact plenty of examples in recent history of extraordinary returns on par with or far exceeding that 10,000% level.
I am not saying it is rational I am just saying you are wrong :)
Also, every successful startup ever has had those kinds of returns at some point. So I suspect you are only considering traditional or stable investments, like post IPO stock or whatever.
Satoshi may disagree with you
kw=kilowatt, a unit of power;
kwh=kilowatt-hour, a unit of energy
Electricity is billed per unit of energy.
I think illiquid is the term.
(Edited for clarity)
This ignores efficiency increases in mining hardware. We've basically seen an increase in efficiency of at least 10,000 times, over the past years, from CPU mining (~5000W/GH) to ASIC mining (~0.2W/GH). This completely disconnects the Bitcoin price from mining, and this will continue to happen, as developing more efficient mining chips won't stop, although the rate of efficiency increases will decrease.
So difficulty and price will never correlate, because mining keeps getting more and more efficient.
so perhaps they hold onto their supply, instead of selling at what they think is an artificially low price. but perhaps they panic and decide to unload - prices falls further. either way, the calculation that got them started is much less attractive.
plus, if the incentive to mine drops, the processing power of the network drops, could eventually increase the likelihood of a hack.
That said, at least he adjusted his opinion in the face of evidence -- Econ 101 says we should be seeing inflation and instead we're seeing near-deflation while the Fed is literally printing as much money as they can politically get away with. The monetary cranks keep telling us we're going to see it 'any minute now', because they can't abandon their theories in the face of evidence -- and yes, eventually some inflation will happen at some point, but it's hard to say that'll have made the cranks correct.
I will say that deficits increasing interest rates in a time of expansion and deficits and QE not increasing interest rates during a recession when the taylor rule is at -5% or so are not exactly the same thing.
And I agree on your distinction there, and the historical record bears it out, with inflation rising from 2003-2007 and then near-deflation from 2008 onwards. Thank god we didn't listen to the fiscal hawks in 2009, most of whom were just trying to score political points and make things harder for Obama anyways. Could have been a deflationary spiral similar to what happened to 2000s Japan or 1930s US.
Hm, I think I just bumped Krugman up another notch in my head -- that 2003 article looks a lot less partisan if you look at it in the context of 2003-2008 rather than 2008-2014.
The miners, never, stop. Completely disconnected from the market pricing.
if mining 1 bitcoin costs you 500 dollars and they are sold on the market at 400 why don't you switch off your gear for a while and just buy them ?
Maybe the point is people are merge-mining multiple bitcoins, or the electricity bill for them is way lower than we think it is.
Or any number of other ways of getting free / outright stealing electricity.
(Please excuse the sketchy math in the following post. these figures are just based on searches on Ebay/Google. Most of all I don't know who's doing the majority of the mining and at what scale.)*
(Low End) ($490 investment in mining)
At the current level of mining difficulty a machine that has a hash rate in the 200/g/. Returns about $6.00 worth of BTC a day.
I searched "200 gh/s" in a site that crawls Ebay, The machines for sale at this hash-rate costs about 490. You would recoup the cost of the machine in 81 days.
If it takes 81 days to break even on your investment, even if bitcoin doubles in that time frame you basically made the price of the machine as profit ($490 in 81 days). (meh)
(High End) (18k investment in mining)
Machines in the single digit tera-hash realm come in at under 20k, they peak at 15-20K per machine. Let's average the price at 18k. They make $90 a day according to the calculator. This would mean you would need 200 days to recuperate the cost of the machine.
In this case it takes 200 days to break even on your investment. If bitcoin doubles in that time frame you made 18k in 200 days. (the online calculator said power costs in this time frame are around $70.)
I'm assuming individuals in both these positions are have long-term holding in mind. My rationale is: getting substantially richer in either case requires the price per coin becomes drastically higher. You're also not hemorrhaging money in either case (power costs seem reasonable). It makes more sense for miners to hold as much of what they mine as possible. Both positions seem to hedged on a BTC being priced a lot more higher, in this sense hard to imagine miners to be selling in great quantities.
I also feel that people DIRECTLY buying and selling bitcoin would dwarf the selling pressure of the majority of miners. The barriers of entry for this also seem much lower than setting up the hardware.
You need also to take demand into account.
Of course, Bitcoin is not issued by a QUANGO whose chair appointing government has 10 aircraft carriers, over 5000 nuclear missiles and so forth. Anyone can start up a Bitcoin like currency (Litecoin, Dogecoin etc.)